Credit scores play a crucial role in our financial lives. Apart from determining our loan and credit card eligibility, they are increasingly being used to fix our loan rates and even job applications. If you are trying to build your credit score without satisfactory results, here are some possible reasons of why it is not improving:
1. Errors in credit report: Credit bureaus consider multiple factors such as your outstanding debt, past credit accounts, EMI payment, credit card outstanding and credit mix to calculate your credit score. Any discrepancy in the reporting of these factors might reduce your credit score. Such discrepancies may result from clerical errors made by the bureau or the lender, or due to fraudulent credit applications or transactions. As fetching and reviewing your credit report is the only to detect such errors, ensure to fetch your credit report from each of the bureaus at least once in a year. Alternatively, visit an online lending marketplace to get your free credit report with monthly updates. Once you detect any error, report them to the bureau and the lender for swift resolution. The turnaround time for a credit report dispute resolution can go up to 30 days.
2. High credit utilization ratio: This is the proportion of the total credit card limits used by you. As lenders usually prefer to lend to those with credit utilization ratio below 30–40% level, bureaus too will reduce your credit score on breaching this level. Thus, if you wish to improve your credit score, ask your credit card issuer to increase the credit limit of your card(s) or apply for additional card(s).
3. Delay or defaults in debt repayment: Lenders report defaults or delays in debt repayments to the credit bureaus. These are then recorded in your credit report and factored in while calculating your credit score. As repayment history is widely believed to receive the maximum weightage in the calculation of credit score, missing payments by the due date will continue to hurt your credit score.
4. Unhealthy credit mix: Bureaus consider your credit mix while calculating your credit score. The term ‘credit mix’ refers to the ratio of the unsecured and secured debt owed by you. As lenders give preferential treatment to borrowers with higher share of secured loans like home loans and car loans, credit bureaus too score such borrowers favourably. Thus, if you are aiming to improve your credit score fast, try to prepay your unsecured loans like personal loans and loan against credit card to increase the share of secured loans. Alternatively, you can also improve your credit mix by replacing unsecured loans with secured ones like gold loan, loan against securities or top-up home loan (in case of existing home loan borrowers).
5. Frequent loan or credit card enquiries with lenders: As soon as you apply for a loan or a credit card, the lender will request your credit report from the bureaus to evaluate your credit worthiness. Such lender-initiated requests are considered as hard enquiries and bureaus reduce your credit score by a few points with each such enquiry. Thus, if you have a low credit score, avoid direct loan enquires with the lenders. Instead, visit online lending marketplaces to compare and apply various loan and credit card options. Credit report requests initiated through online lending marketplaces are considered as soft enquiries and they do not impact your credit score in any way.
6. Delayed payments or defaults in joint or guaranteed loan accounts: Becoming a joint borrower or guaranteeing a loan on behalf of a third party makes you equally liable for late payments or defaults in those loan accounts. Negative events in those accounts will continue to reduce your credit score along with that of the main applicant. Hence, make sure to regularly monitor such accounts if you are already having a low credit score.
7. Closing older accounts: Often people with lower credit score close their old credit cards or credit accounts in the hope of reviving their credit score. However, such acts might instead reduce your credit score further. While closing your old credit card(s) might reduce your credit score by decreasing your total available credit limit, closing a secured loan may increase the share of unsecured loans in your credit mix. Moreover, lenders also score borrowers favourably with longer length of credit history. Hence, desist from closing your old credit accounts if you are already having a low credit score.
(By Radhika Binani, Chief Products Officer, Paisabazaar.com)